Tanzania Unveils State-of-the-Art Electric Railway
Shikana Group
Leading legal and investment advisory firm specialized in foreign investments in Africa.
INTRODUCTION
Welcome to this week's East African Community (EAC) Update. As we navigate the complexities of the global economic landscape in August 2024, our region continues to demonstrate its resilience and potential.
This edition shines a spotlight on the encouraging trends in foreign direct investment (FDI) across the EAC, defying the global downturn. We explore how member states are attracting investment in diverse sectors, from financial services to renewable energy, and examine the implications of these developments for regional economic growth.
Despite challenges, East Africa is emerging as a destination for international investors. Our analysis covers the opportunities and challenges shaping the EAC's investment climate. It offers? valuable insights for stakeholders engaged in or considering ventures in the region.
Join us as we unpack these trends, their significance for the EAC's economic trajectory, and what they mean for investors looking to tap into East Africa's potential.
TREND OF THE WEEK
East Africa has shown resilience in attracting foreign capital, bucking the global trend. In 2022, FDI inflows to the East African Community (EAC) reached USD 5.8 billion, a 17% year-on-year increase, while global FDI declined by 12% to USD 1.29 trillion.
Key data points:
? DR Congo led with USD 1.85 billion in FDI inflows
? Uganda saw a 39% increase to USD 1.526 billion
? Tanzania attracted USD 1.111 billion, up 8%
? Kenya experienced a 64% increase to USD 759 million
? South Sudan had the highest growth rate at 80%, receiving USD 121 million
Financial services emerged as the leading sector for FDI projects from 2019 to 2022, followed by software and IT services. However, the agriculture sector, despite its significant contribution to GDP and employment, received minimal foreign investment.
FDI as a percentage of the EAC's GDP is projected to rise from 1.4% in 2022 to 2.8% in 2024, indicating potential for significant expansion. This growth in FDI, amid challenging global conditions, underscores the region's attractiveness to investors and its economic resilience.
TOP HEADLINES
TANZANIA
1. President Launches Modern Railway, Economy Projected to Grow
Tanzania has inaugurated a 541-kilometer electric standard gauge railway (SGR) connecting Dar es Salaam and Dodoma. It is a notable milestone in the country's infrastructure development. The USD 3.1 billion project, constructed by Turkish firm Yapi Merkezi, is part of a planned 2,561-km rail network aimed at supporting domestic and regional trade.
Key aspects of the railway project:
- Electric train services launched between commercial and administrative capitals
- Part of a larger network to connect with neighboring countries
Financed partly by a $1.46 billion loan from Standard Chartered Bank Tanzania
- Expected to improve business and mineral transport, particularly with Burundi
Economic Outlook:
- Real GDP growth projected at 6% in 2025, up from 5.7% in 2024
- Inflation expected to remain stable at 3.3-3.4% in 2024-2025
- Growth driven by agriculture, manufacturing, tourism, and public investments
- Fiscal deficit projected to stabilize at 2.5% of GDP in 2024-2025
- Current account deficit forecast at 4.0% of GDP in 2024, 4.2% in 2025
Challenges and Opportunities:
- Climate change impacts require an estimated USD 6.3 billion annually to address
- Government emphasizing agriculture, industry, and value addition in development plans
- Calls for improved access to concessional financing from international institutions
- Potential risks include geopolitical tensions, global growth slowdowns, and climate shocks
The SGR project, while an important achievement, is part of a broader African infrastructure drive that has raised concerns about debt sustainability. However, it represents Tanzania's commitment to improving its transport network and regional connectivity. Economic forecasts suggest cautious optimism, with stable growth expected despite global challenges.
This development could have implications for regional trade, urban-rural connectivity, and Tanzania's competitiveness in the East African market. Investors and businesses may find new opportunities in sectors benefiting from improved logistics, while also needing to consider the broader economic context and potential risks outlined in the AfDB report.
KENYA
2. Nairobi Hosts Key Distribution Sector Forum
Nairobi recently hosted the inaugural EAC Peer-to-Peer Learning Conference, focusing on challenges in the distribution sector across East Africa. The event, which brought together stakeholders from wholesale trade, retail, and franchising, coincided with signs of economic recovery in Kenya.
The conference highlighted several key issues affecting the distribution sector in the region. A diagnostic study presented at the event revealed that restrictive investment laws are impacting the entry and operations of wholesale and retail firms across EAC Partner States. Other challenges identified include burdensome administrative requirements, weak links with local suppliers, high investor exit rates in the retail sector, and insufficient industry skills.
These findings are particularly significant given the importance of distribution services to the EAC economies. The sector contributes between 3% and 10% to GDP across the region and employs over 10% of the active population in many EAC countries. However, the informal sector still dominates, handling about 70-80% of sales in East Africa.
The conference's focus on peer-to-peer learning and knowledge exchange with countries that have implemented successful reforms suggests a potential shift in regulatory approaches. This could lead to more favorable conditions for both domestic and foreign investors in the distribution sector.
Concurrently, Kenya's economy is showing signs of recovery. The Stanbic Bank Purchasing Managers' Index (PMI) rose to 51.3 in February, indicating expansion for the first time since August 2023. This upturn, driven by lower fuel prices and decreased input costs, could provide a boost to the distribution sector.
From an investment perspective, these developments present both opportunities and challenges. The potential for regulatory reforms following the conference could create a more favorable environment for large-scale retail and wholesale operations. However, investors should be mindful of the sector's current fragmentation and the dominance of informal operators.
The conference's emphasis on addressing skills gaps and improving links with local suppliers suggests potential opportunities in supply chain modernization and workforce development. Investors might consider strategies that bridge the gap between formal and informal sectors, potentially through innovative distribution models or technology solutions.
UGANDA
3. Bold Initiative to Transform Traders into Manufacturers
The Uganda Investment Authority (UIA) has unveiled an ambitious plan to encourage traders in Kampala's Kikuubo business hub to transition from importing goods to manufacturing them locally. This initiative, called "Transitioning Kikuubo Traders to Manufacturing," aims to increase import substitution and utilize the expertise of seasoned traders to drive Uganda's industrialization efforts.
Robert Mukiza, Director General of the UIA, announced the program during a meeting with Kikuubo traders and officials from the Global Competitiveness Initiative (GCI) and the Presidential Advisory Committee on Exports and Industrial Development (PACEID). The initiative offers incentives such as zero tax rates, free industrial park land, and tax holidays to participating traders.
This move aligns with Uganda's broader economic strategy to reduce reliance on imports and stimulate domestic production. Mukiza highlighted the multiplier effects of manufacturing over trading, including increased local production, value addition to raw materials, job creation, and improved personal and government incomes.
To support this transition, the UIA is acquiring additional land in Namanve Industrial Park specifically for Kikuubo traders interested in manufacturing. The authority also encourages traders to consider establishing factories in other industrial parks across Uganda, depending on their target markets.
The program comes at a time when Uganda is positioning itself as an attractive investment destination. Mukiza noted that foreign investors are flocking to Uganda due to its favorable business environment and high profitability potential, ranking third after Egypt and Ethiopia in the region.
Importantly, this initiative is part of a larger trend in Uganda's economic development. According to a World Bank Uganda Economic Update report, the country has seen a shift towards more productive sectors. The industrial sector, including manufacturing, construction, and mining, has grown from 20% of GDP in 2010 to 26% in 2022. Meanwhile, the services sector has declined from 50% to 42% of GDP over the same period.
The report also highlights that Uganda's exports have become more diversified, with a decrease in traditional exports like coffee, cotton, and tea, and an increase in non-traditional exports such as fish, flowers, and manufactured goods. This trend aligns with the UIA's push for local manufacturing and import substitution.
RWANDA
4. Government Seeks $3.4 Billion Annually as EADB Launches $36 Million SME Fund
Rwanda is at a critical juncture in its economic development, requiring substantial investments to transition from a labor-intensive to a knowledge-based economy. A recent African Development Bank (AfDB) report reveals that Rwanda needs $3.4 billion annually for structural transformation, highlighting the country's early stage in shifting from low-value agriculture to higher-productivity sectors.
Simultaneously, the East African Development Bank (EADB) has launched a $36 million fund targeting SMEs in key sectors like agriculture, transport, commerce, and manufacturing. This initiative aims to address the financing gap for SMEs still recovering from COVID-19 impacts and traditionally viewed as high-risk by local banks.
The convergence of these developments represents Rwanda's multi-pronged approach to economic growth. How?
1. The AfDB report emphasizes the need for investment in human capital, research, innovation, and climate action to drive productivity growth.
2. The EADB fund, distributed through local financial institutions, aims to bolster a sector that employs over 2.5 million people in Rwanda.
3. Both initiatives highlight the broader challenge of accessing finance for developing countries, with calls for reforms to credit rating approaches and the global financial system.
领英推荐
BURUNDI?
5. EAC One Network Area Expands
Effective August 1, 2024, Burundi has joined the East African Community (EAC) One Network Area (ONA). That is a major step in regional telecommunications integration. This development, announced by the Burundi Telecommunications Regulation and Control Agency (ACRT), aligns with Decree No. 100/202 of October 2, 2023, which outlined Burundi's accession to the EAC ONA.
With Burundi's entry, six out of the eight EAC partner states have now implemented the ONA framework, which aims to reduce cross-border communication costs within the region. Kenya, Rwanda, South Sudan, Uganda, and Tanzania are the other participating countries, while the Democratic Republic of the Congo and Somalia have yet to join.
The ONA framework, developed in 2014 and endorsed by EAC Heads of State in 2015, imposes price caps on roaming charges and eliminates surcharges on cross-border telecommunications traffic within the EAC. This initiative is expected to significantly lower costs for regional communications, benefiting both individual users and the business community.
Key aspects of Burundi's implementation include:
1. New competitive tariffs for regional roaming
2. Directives for mobile network operators to clearly communicate applicable tariffs
3. Requirements for detailed billing to ensure transparency and user satisfaction
Hon. Andrea Aguer Ariik, EAC Deputy Secretary General for Infrastructure, Productive, Social, and Political Sectors, emphasized the importance of this development for regional integration. He noted that the ONA facilitates easier communication for businesses operating across the region and supports the free movement of persons, services, and capital as outlined in the EAC Common Market Protocol.
The ONA expansion is part of a broader effort to strengthen East African integration. It addresses longstanding concerns about high roaming charges that have hindered cross-border communication and business activities. As the region moves towards full implementation across all partner states, the ONA is expected to play a crucial role in fostering a more integrated East African economy.
This development presents potential opportunities and implications for telecommunications companies, businesses operating across borders, and consumers in the region. It may lead to increased communication and collaboration across the EAC, potentially stimulating cross-border trade and economic activities.
ETHIOPIA
6. Government Implements Sweeping Public Sector Wage Reform?
Prime Minister Abiy Ahmed (Dr.) has announced salary increases for Ethiopian government employees. It marks a major shift in the country's economic climate. The reform, allocating over USD 1.1 billion (90 billion birr), aims to address long standing issues of low pay and support those most impacted by recent financial adjustments.?
Some lower-income workers are set to see their wages increase by up to 300%, a move described as unprecedented in Ethiopian history.
This bold initiative comes just one week after Ethiopia floated its currency, resulting in a 60% depreciation of the birr. The timing shows the government is committed to alleviating the financial burden on workers amidst ongoing economic changes. While employees earning as little as USD 18.7 (1,500 birr) monthly will see substantial increases, those earning above USD 311.5 (25,000 birr) have not seen immediate changes. That shows Dr. Abiy’s focus is on supporting the most vulnerable workers.
The reform addresses severe wage inadequacies highlighted in a 2023 Addis Standard report, which revealed that even industrial workers with degrees earned as little as USD 37.4 (3,000 birr) monthly. Many struggled to cover basic needs despite dual incomes, leading to high employee turnover and physical strain in various sectors.
In parallel with these wage increases, Ethiopia is considering introducing minimum wage legislation, drawing inspiration from Vietnam's successful model. The proposed structure includes a National Wage Council and a technical board comprising various stakeholders, which indicate a comprehensive approach to wage policy.
This wage reform places Ethiopia's labor market in a new light compared to its regional counterparts. As of March 2024, Kenyan government employees averaged over USD 543.2 (KES 70,000) monthly, highlighting the considerable gap that Ethiopia is now working to close.
For investors, these developments present a mix of opportunities and challenges. The potential increase in consumer spending power could benefit the retail and consumer goods sectors. However, businesses may need to reassess their compensation strategies in light of the potential upward pressure on private sector wages. The reform could also intensify regional competition for skilled workers, making talent acquisition and retention key considerations for companies operating in East Africa.
UPCOMING EVENTS
1. Webinar - Tanzania Financial Sector Overview 2024
What: Join us (Shikana Group) for a 45-minute discussion on our comprehensive market research overview of finance in Tanzania. Our experts will break down key findings, highlight emerging opportunities, and provide valuable data for anyone looking to navigate this market.
Where: Online (virtual event)
When: August 14, 2024, at 3 PM East Africa Time (EAT)
Why Attend:
Who Should Attend:
Register: Email [email protected]?
2. East Africa Investment Forum 2024
What: A collaborative initiative by the Tanzania Fintech Association (TAFINA) and fintech communities across East Africa aims to spotlight innovation, promote partnerships, and showcase investment opportunities in the region.?
Where: Dar es Salaam Serena Hotel, Tanzania
When: September 12–13, 2024
Why Attend:
Who Should Attend:
Registration: Email [email protected] or call +255 621481990. Various ticket options are available, ranging from basic one-day passes to premium corporate packages with VIP access.
OPINION OF THE WEEK
“It is a once-in-a-lifetime opportunity to see a country being rebuilt.?
We have seen it in Rwanda and Sierra Leone. Every time that happens, it brings great opportunities.?
When a country has the kind of destruction Somalia has had, a boom follows. The opportunities are limitless.”
Liban Egal, founder and chairman, First Somali Bank
CONCLUSION
This week's updates highlight the multifaceted progress and challenges facing the East African Community. From infrastructure development to economic integration and financial support for small businesses, the region is demonstrating its commitment to growth and connectivity.
Burundi's entry into the One Network Area marks a significant step towards regional integration, promising reduced communication costs and easier cross-border interactions. This move, along with Tanzania's launch of its modern railway line, underscores the EAC's focus on enhancing both digital and physical connectivity across member states.
Rwanda's new SME fund illustrates the region's efforts to support grassroots economic development, recognizing the vital role of small and medium enterprises in driving growth and employment. Meanwhile, Tanzania's positive economic outlook, despite global challenges, offers encouragement for the region's resilience and potential.
These developments, combined with the overall increase in foreign direct investment, paint a picture of a region on the move. However, challenges remain, particularly in addressing economic disparities between member states and sectors.
We encourage our readers to view these developments holistically, recognizing that progress in infrastructure, economic policy, and regional integration are all interconnected pieces of the EAC's growth story. As always, we will continue to monitor and report on these developments, providing you with the insights needed to navigate this exciting and complex region.
RESOURCES